3 online music game-changers

These innovative services are transforming the way listeners listen to their favorite tracks and discover new ones.

This is one in a series of articles leading up to the Fortune Brainstorm Tech conference, which will be held from July 19-21 in Aspen, Colorado. Fortune Brainstorm Tech will round up many of the best and brightest thinkers in technology. Our coverage in this series will examine the progress of companies that presentedlast year and give an idea of what to expect this year.

For years, record labels lost money as album sales plummeted (at least until recently, when for the first time since 2004, sales inched up during the first half of 2011). Piracy and high-speed Internet share much of the blame: For users with broadband connections, downloading illegal torrents of entire albums can take minutes and a few mouse clicks. For better or worse, labels and companies have been forced to innovate in music distribution and sales.

A few companies have really wised up, developing and iterating online products and services that take cross-platform use — desktop, tablet, smartphone — and combine it with free offerings, social networking, and personalization. They’re transforming the way we listen to and discover new music while trying to find new ways to make money.

From a decade-old veteran to a two-month-old newbie, here are three services leaving their mark.

What it does: Launched in 2008, the simple, legal “all-you-can-eat” music service made waves in parts of Europe with an innovative freemium model that lets users listen to over 13 million tracks for free, a stark contrast to competitors like Rhapsody that require upfront monthly paid subscriptions. “The essential feeling we wanted to create was to have all of the world’s music available at your fingertips,” says Ek. To that end, Spotify is wicked fast, and snappier than Apple’s AAPL iTunes. Though all its music resides “in the cloud,” it feel like it lives on your hard drive.

How it makes money: Users don’t have to pay a cent upfront to tune in, but the “free” tier is ad supported and places caps on the number of hours music can be streamed and the number of times a song can be listened to each month. Spotify’s premium plans scale up to $10 a month and lets users store songs on their mobile devices. Ek believes that presenting as low a barrier of entry as possible — that initial free listening — and coupling it with a sharp user experience is important to reeling in users. So far, it seems to be working: 1 million of his 10 million users are paid subscribers. Spotify is not yet available in the U.S., but the company says it is signing the remaining licensing deals it needs to launch here.

What it does: Launched little more than a month ago, Turntable.fm is all about “social listening.” Each user gets an avatar he or she can use to enter various chat rooms-turned-listening rooms. With music playlists in tow, they can become one of five featured DJs in the room, taking turns cranking music out from either the site’s current music library, provided by MediaNet, or their own hard drives. Listeners can then deem tracks “lame” or “awesome.” Those songs with many “lame” votes are skipped, while songs with enough “awesome” votes reward the DJs with features like more personalization options for their avatars. And if they like a song that much, they can add it to their own playlist, buy it off iTunes, or find it via Last.fm or Spotify.

How it makes money: It doesn’t. There isn’t a business model to speak of yet. The currently-invite-only service remains free, though it reportedly pays fees to Sound Exchange, a non-profit rights organization that collects royalty fees, and publishers for every track played.

What it does: Of the three services, 11-year-old Pandora P is by far the oldest and most mainstream. (After all, Spotify isn’t even in the U.S. yet, and Turntable.fm just launched in May.) Users create music “stations” based on artist, track, or composer that stream and customize music based on users’ tastes. “Like” a particular track, and Pandora will play more similar songs. If you don’t “like” it, you’ll never hear it again.

How it makes money: Well, it doesn’t. Despite ads and growing revenues, Pandora has never actually turned a profit due to the fact that the royalty fees it pays music labels every time a song is streamed are higher the company’s ad revenues. Which is why it’s incurred $92.1 million in losses since it was founded in 2000. According to Pandora’s pre-IPO filing, it’s a situation company execs don’t expect to change until at least next year, but as Fortunehas pointed out, that’s pretty darn optimistic.

To learn more about how online music services are trying to snag listeners, look out for coverage of the panel, “Drive Time: The Battle for Online Listeners,” when Ek and Westergren join Fortune Managing Editor Andy Serwer and others on July 20.